Chinese Search Engine Baidu May Face Tougher Rules After State Media Criticism

Chinese search engine Baidu Inc may face tighter regulations after facing a barrage of criticism from state media.

Chinese search engine Baidu Inc. may face tighter regulations after facing a barrage of criticism from state media over its business practices at a time when it is cementing its dominance of the booming Internet market.

Analysts and various state media have suggested tougher rules could be imposed on the company in the wake of an investigative report by China Central Television (CCTV) which exposed how easy it was to register and promote a fake website on Baidu's search platform and conduct fraud.

Baidu has built its share of China's search market significantly since Google's high-profile exit last year citing hacking and censorship concerns.

"As Baidu becomes an essential part of people's Internet life, we believe the news report could trigger potential government investigations on the paid search business model and prospective regulations to protect customer rights," Wallace Cheung, analyst at Credit Suisse in Hong Kong, said in a research note published on Tuesday. Cheung has an "underperform" call on Baidu.

The half-hour CCTV report showed an under-cover reporter getting advice from an apparent employee of Baidu over how to get around regulations covering pharmaceutical advertising.

Baidu declined to comment on the report.

China's search market grew 62 percent in the second quarter to 4.3 billion yuan ($665.9 million), with Baidu capturing almost 76 percent of the market, data from Beijing-based technology firm Analysys International showed.

"As suggested by some experts, if Baidu cannot discipline itself, authorities should consider stepping in. Just as we do not live for food, Baidu should not just exist for money," said an article published on the People's Daily website, the mouthpiece of China's Communist Party.

Shares of Baidu have fallen by almost a 10th in the past two days since the report ran, wiping more than $5 billion in market value off the Nasdaq-listed company.

The stock fell 5 percent on Tuesday, after sliding 4 percent the previous session, in a sector-wide selloff. Sina Corp, China's largest Internet portal, fell over 7 percent while fell 5.8 percent on Tuesday, as the broader benchmark index fell 1.2 percent.

Baidu shares are still up nearly 50 percent so far this year, giving it a market value of around $50 billion.

Some analysts said the steep fall in Baidu's share price is likely to be short-term.

"I have not changed my opinion about the company. It's still a buy," Paul Wuh, an analyst at Samsung Securities in Hong Kong, said by telephone on Wednesday.

"The company suggested that it has thousands of sales personnel and some bad behavior is not caught all the time," Wuh said in a research note published on Tuesday.

Wuh said he would only revisit his view and earnings estimates on Baidu if regulators decide to introduce measures "which will limit its ability to monetize its search platform."

CCTV has run negative stories on Baidu before. Last year, it accused the search engine of promoting counterfeit drugs and in 2008 it said Baidu sold links to unlicensed medical sites with unproven claims for their products, causing the firm's shares to tank and its fourth-quarter earnings to sink.

CCTV has also run reports this year exposing counterfeit goods sold on Alibaba Group's Taobao, the country's top e-commerce website.

Chinese media have also become more emboldened in reporting on controversial subjects generally, with attempted state censorship over coverage of last month's deadly train crash widely ignored.